fiscal cliffWe are now in the 5th year since the “official” end of the Great Recession.   Numerous indicators of the state of the U.S. economy point to a non-recovery:

  • The participation rate is low and supported by baby boomers working more or coming out of retirement.
  • Students (the future labour force) are defaulting on their loans in record amounts.
  • Disposable income is still below its pre-recession level.
  • An ever increasing share of disposable income is being spent on health care, crippling discretionary spending.
  • Higher interest rates are further depressing discretionary spending (home and auto sales).
  • All of which is resulting in anemic business and economic activity.

Claims that the U.S. economy is suddenly rebounding have been made before. They are misleading at best and fallacious at worst. It would not be surprising to see further deterioration, which would force central planners to initiate additional unconventional intervention (i.e. Quantitative Easing).


Markets At A Glance By Eric Sprott, Sprott Global:

We are now in the 5th year since the “official” end of the Great Recession (the National Bureau of Economic Research (NBER), which officially dates U.S. recessions, said the recession ended in the second quarter of 2009), but it hardly feels like a recovery. Nonetheless, the media, sell-side economists, central bankers, the IMF, etc. all claim that the U.S. economy is now firmly out of the woods.

President Barack Obama said in his State of the Union speech that he believes 2014 “can be a breakthrough year” for the U.S. economy and the IMF, which raised its forecast for U.S. GDP growth in a report titled “Is the Tide Rising?”, now predicts growth of 2.8% in 2014.1

However, a closer look at the data suggests that things are not improving and that the U.S. economy remains frail. Many point to the unemployment rate as a sign that things are getting better. Indeed, it has been declining steadily for many years and now stands at 6.7%. However, what many seem to forget is that the unemployment rate is declining for the wrong reasons.

Yes, the U.S. has been adding new jobs, but a large share of the decline in the unemployment rate can be explained by discouraged workers leaving the labour force.2 This effect can be seen in the falling participation rate. Many argue that this decline in the participation rate is structural and is caused by population aging. This explanation is superficial and misleading.

Figure 1, shows the contribution to the total participation rate for various age groups. As shown in Figure 1, since January 2005, the participation rate has fallen by 2.9% (from 65.8% to 62.9%). Of this decrease, 1.3% and 4.7% were driven by the 16-24 and 25-54 age groups, respectively. The rest was offset by a 3.1% increase in participation by the 55+ cohort.

FIGURE 1: CONTRIBUTION TO U.S. PARTICIPATION RATE (%)
maag-03-2014-T1.gif

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Note: Sum of individual components adds up to total participation rate.
Source: Bloomberg, Sprott Calculations

This is reflective of a deep problem, as it suggests that baby boomers are failing to make ends meet and have to work for longer or even come out of retirement, and that the future workforce, those in their prime working years, are leaving the labour force.

Interestingly, without the “3% contribution” from the 55+ cohort, the labour force would have fallen below 60% for the first time since 1971, a period when the participation rate was starting to expand, driven mainly by women entering the workforce.

But that’s not all; many of those in their early 20s, seeing how hard it is to find a job, are staying in college for longer, amassing outrageous levels of student debt in the process. This is obviously not a sustainable solution. Delinquency rates on student loans (the bulk of them insured by the U.S. Government) are now at all-time highs (Figure 2). Most of these student loans have been securitized and sold to investors with the Government’s stamp (sound familiar?).

FIGURE 2: STUDENT LOANS % 90+ DAYS DELINQUENT
maag-03-2014-C1.gif
Source: Bloomberg, Sprott Calculations

 

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For all the rest (ages 25-54), the participation in the labour force has also been declining, although at a slightly slower pace. Nevertheless, the average U.S. consumer is still worse off than it was before the Great Recession. Real disposable income per capita (Figure 3) is lower than it was at the end of 2005 while, over the same period, health care costs have increased from 10.0% to 11.5% of GDP (Figure 4), thereby reducing funds available for discretionary spending.

FIGURE 3: REAL DISPOSABLE INCOME PER CAPITA
INDEX 2005 Q4 = 100
maag-03-2014-C2.gif
Source: Bloomberg, Sprott Calculations

FIGURE 4: HEALTH CARE SPENDING AS A % OF GDP
maag-03-2014-C3.gif
Source: Bloomberg, Sprott Calculations
Not surprisingly, lower disposable income and discretionary spending levels for the average American are reflected in declining retail sales growth (Figure 5 shows the year-over-year growth rate in retail and food services sales).

FIGURE 5: RETAIL AND FOOD SERVICES SALES
YEAR-OVER-YEAR GROWTH
maag-03-2014-C4.gif
Source: Bloomberg, Sprott Calculations

Moreover, since the summer of 2013, when the Federal Reserve lost control of the bond market (see our article “Have we lost control yet?”, June 2013)3, we have seen a clear deterioration in demand for credit dependent purchases. Since these purchases are mostly made on credit (mortgages, car loans), increases in interest rates have made them unaffordable to many customers. Thus, because of the large and sudden increase in interest rates, housing sales have slowed significantly, as can be seen in Figure 6. Similarly, car sales growth has been on a declining trend since it peaked in mid-2012 (Figure 7).

FIGURE 6: U.S. HOME SALES
YEAR-OVER-YEAR GROWTH
maag-03-2014-C5.gif
Source: Bloomberg, Sprott Calculations

FIGURE 7: US AUTO SALES
YEAR-OVER-YEAR GROWTH
maag-03-2014-C6.gif
Source: Bloomberg, Sprott Calculations

On the supply side, things do not look rosy either. The U.S. composite PMI has been more or less flat for the past 3 years (Figure 8) and has suffered a sharp decline since its August 2013 “peak”. Other indicators, such as the durable goods new orders have been growing at a declining pace (Figure 9).

FIGURE 8: ECONOMY WEIGHTED MANUFACTURING & NON-MANUFACTURING COMPOSITE PMI
maag-03-2014-C7.gif
Source: Bloomberg, Sprott Calculations

FIGURE 9: US DURABLE GOODS NEW ORDERS
YEAR-OVER-YEAR GROWTH
maag-03-2014-C8.gif
Source: Bloomberg, Sprott Calculations

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To conclude, numerous indicators of the state of the U.S. economy point to a non-recovery:

  • The participation rate is low and supported by baby boomers working more or coming out of retirement.
  • Students (the future labour force) are defaulting on their loans in record amounts.
  • Disposable income is still below its pre-recession level.
  • An ever increasing share of disposable income is being spent on health care, crippling discretionary spending.
  • Higher interest rates are further depressing discretionary spending (home and auto sales).
  • All of which is resulting in anemic business and economic activity.

Claims that the U.S. economy is suddenly rebounding have been made before. They are misleading at best and fallacious at worst. It would not be surprising to see further deterioration, which would force central planners to initiate additional unconventional intervention (i.e. Quantitative Easing).

Post-scriptum:
Wow! In a recent Bloomberg article, Andrew Gracie, an executive director at the Bank of England (BoE), was proposing that in the event of a bank failure, regulators could suspend derivatives contracts affecting the failed bank on a global basis.4 He further argues that “The entry of a bank into resolution should not in itself be an event of default”. In other words, the solution proposed by the BoE to deal with a bank that fails and that has entered in a mountain of derivatives contracts is to suspend the market.

But this misses the point. As usual, regulators try to patch things up instead of proposing true solutions. What they are effectively proposing is to suspend reality, yet again, and pretend that there are no problems. This is even worse than suspending mark-to-market! How ironic that the same regulators who allowed this to happen are the ones who ask the market to suspend reality.

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1 http://www.imf.org/external/pubs/ft/weo/2014/update/01/
2 See the January 2013 Markets at a Glance,“Ignoring the Obvious”: http://www.sprott.com/markets-at-a-glance/ignoring-the-obvious/
3 http://www.sprott.com/markets-at-a-glance/have-we-lost-control-yet/
4 http://www.bloomberg.com/news/2014-03-04/boe-seeks-derivatives-pact-to-prevent-a-repeat-of-lehman-cascade.html


  1. I own a small business. No corprate franchise or anything like that. I can tell you without doubt, the industry I`m in is dominated by corporate stores, and they are struggeling mightely. I`m enjoying moderate growth, nothing spectacular, but I`m happy. The corporate boys stop by to chat, and the talk always morphs to joining them. They list all the things that they can do for me(that I already have) and how my paying them 6% off the top, well be returned 10 fold. Thats when I laugh, and they leave. i know people in the franchise world of this industry, and they get talked down off a high bridge monthly.
     
    I told you that, so I can tell you this. Cash transactions are exploding. The corporate boys hate this. It`s hard to track.  I`ve gone so far as to ask customers why cash? Many respond, the Target Stores hack. Some just say they are tired of credit cards.
     
    The point is, how can we be having a recovery, in a credit dominated economy, if people are turning back to cash?
     
    I`m talkng abouta 40% increase in cash sales in the last 18 months.

    • @Silver Dollar
       
      Congrats on your business doing as well as it is in these times, SD.  That is not an easy task.  I know because my wife owns a dress shop and has been struggling for the past couple of years.  She is doing better these days, though, so that’s good.
       
      I will be convinced that the “recession” is over when I can walk down the street in the business areas of my town and see more “Help Wanted” signs than “Going Out of Business” and “Closed” signs.
       
      As to this so-called recession, it does not look like a recession to me.  Thanks primarily to Fed and Gov meddling in the economy, this recession was deeper and longer than any in my 64 year life-time.  IMO, it is not a recession but a depression.  The primary difference between a recession and a depression is magnitude and duration.  Recessions usually reduce stock values by 15-20% and then recover in 9-19 months.  The average recession lasts about 13 months.  Employment falls during a recession but then quickly ramps back up to pre-recession levels, if not a little higher to help replace depleted inventories.  A depression, on the other hand, reduces stock values by 35-50% and can last for a decade or more.
       
      Typically, a recession is defined at 2 or more quarters of declining national production.  This is a simple definition but it seems to be widely accepted among economists.  While there are multiple definitions of the term “depression”, the one I favor is “an extended period of falling national production coupled with persistently high unemployment”.  Which of these seems to describe the current situation in the US? 
       
      The Great Depression of the 1930s lasted for over a decade… from early in 1930 to late in 1941.  It was not until WW-II that the US pulled out of it.  In multiple instances, the US Gov and Fed took actions that history has shown prolonged the Great Depression, causing more harm than good.  The urge to “do something, even if it’s wrong” seems to be overwhelming in DC.  Typically, when people “do something” just to be doing it, it is the wrong thing to do.  The Fed and the US Gov in 2008-14 have “done something” but, again, it was not the right thing to do and their actions have not only not helped solve the current depression but have exacerbated the situation considerably.
       
      The term “jobless recovery” is an oxymoron… emphasis on the “moron” part.  ALL recoveries create lots of jobs.  That this one has not shows that this is not a recovery.  Yes, Wall Street has made a terrific recovery from its 2008 lows but Main Street has not.  WAY too many Americans are unemployed or under-employed.  Many want full-time work but are only able to find part-time work.  This is not any kind of “recovery” that I have ever seen.  In the past, businesses were looking high and low for people to fill jobs.  Those who were available but did not have the required skills were trained at a reduced wage until they did and then they received a full wage for their labors.  Now, however, many businesses are doing everything they can to avoid hiring anyone.  Many of them are looking for additional ways to reduce their labor force.  No, friends, this is not a recovery… not ANY kind of a recovery.
       

    • @Silver Dollar
       
      I think that she has.  A lot of her business is cash but I don’t know for sure how much of an increase she has seen in the last several months.  I’ll ask her and get back to you on that.
       
      I think that her average sale is probably in the $250-300 range.  Most of this is wedding, prom, mother of the bride, Quinceañera, and other special occasion dresses plus tuxedo rental.  She also sells costume jewelry and accessories for brides and bridesmaids.

    • @Silver Dollar
       
      OK, I just checked with her and she corrected me on 2 counts.  First, her average sale is about $160.  While she sells wedding dresses for $400-500 a pop, she also sells accessories that bring the average down quite a bit.  Second, she says that her cash business is up about 50% over the past 6 or so months.  Additionally, shoppers at her store have doubled their budget from $500 to $1000 when shopping for their wedding dresses and other paraphernalia.  While that last is only 1 tiny data point in the local economy, it seems significant.
       

  2. Gee, Mr Sprott, you are such a sour puss. The government pours 26 billion every month for welfare, SS, SSI, S.N.A.P, unemployment insurance entitlements into the economy, 85 billion a month to buy MBS’s and stocks through the Fed’s agencies, defense spending or should we say defense cuts are at 500 billion for the next 9 years with another 500 billion cut out of discretionary spending…spells out to anyone listening…g-o-o-d  t-i-m-e-s if you are in the stock market. He must have bet against the Fed Gov? With Obama as it’s titular head? Say what? Yea, he is a sour puss.

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